Trading Strategies in Freeport-McMoRan Copper & Gold (FCX)

Option Strategies in Freeport-McMoRan With copper and gold prices expected to keep charging higher, it's no surprise that analysts have turned their attention to Freeport-McMoRan Copper & Gold FCX. Monday, Stifel Nicolaus upped its rating on the stock to “buy” from “hold” with a 12-month price target of $140 (according to Bloomberg). This is roughly 18% of upside from current levels.

FCX shares are poised to overtake the 120 level for the first time since mid-2008. The stock's uptrend has been strong, taking the shares 80% higher in the past six months.

Bulls may believe that the trend is Freeport's friend as it fights to overcome this next level of technical resistance. FCX skeptics may feel that the metals futures could be ready for a pullback, which could in turn impact any related equities. Either way, investors may be looking for alternatives to simply buying or selling the stock outright. Options strategies such as the spreads described below might be worth considering. (New to options trading? Practice with fake money in a virtual trading account before putting any capital at risk).

These descriptions below (one for bulls, one for bears) are for educational purposes only and should not be considered buy/hold/sell recommendations. Prices were taken Tuesday morning, when FCX shares were trading at $119.76, up $1.74 on the day.

Bullish Option Strategy: Long Call Spread

Investors who are bullish on the copper/gold markets (and on FCX) could consider a long call spread, which is a bullish strategy involving the purchase of one call and the simultaneous sale of another call farther out of the money. For example, a trader could buy the in-the-money February 114 call and sell the out-of-the-money February 124 call, paying a net debit of $5.20. Shorting the higher-strike call and collecting a credit helps offset the price paid for the in-the-money option.

Losses are limited to this $5.20 premium paid and the maximum loss occurs if FCX is trading below the long strike (114) when the options expire. Gains are capped at the difference between strikes less the premium paid, or $4.80. The maximum potential profit is achieved at expiration if FCX is trading above the 124 strike. Breakeven for this spread trade is $119.20, or the long strike plus the debit paid.

Using a profit/loss calculator, I can build charts such as the one below. The OptionsHouse profit/loss calculator allows users to change variables such as stock price, volatility, and time until expiration to visualize how these shifts can impact a strategy's value during its lifespan.

Profit and loss of Freeport-McMoRan (FCX) bull call spread

Bearish Option Strategy: Short Call Spread

Copper bears might consider the opposite of this spread, or a call credit spread, built with a short call and a long call that is father from the money. The February 124/129 call credit spread can be sold for a net credit of $1.35 by selling the 124 call and simultaneously buying the 129 call.

At expiration, if FCX is trading below the 124 strike, gains are capped at the premium collected ($1.35). Losses, which are maximized if the stock is above 129 at expiration, are limited to $3.65. This maximum loss is simply the difference in strikes less the initial credit. Breakeven for this spread is $125.35, allowing for more than 4.5% in upside through February expiration before this trade is in negative territory.

Profit and loss of Freeport-McMoRan (FCX) bear call spread

Photo Credit: jronaldlee

The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.

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